Friday, December 24, 2010

Merry Christmas!

From The Housing Time Bomb.  Travel safe and enjoy spending time with your family.  If this is impossible because your family is dysfunctional then I suggest you start drinking heavily:)

Thursday, December 23, 2010

Has the Fed "Walked Away" from Housing?

Hat tip to Karl Denninger for catching this gem.

The Dallas Fed released an interesting report this morning that discussed the path to a healthy housing market.

It appears the Fed is coming to the conclusion that a reversion to the mean in home prices is the only answer you can see below,  we need to see another 23% drop in housing in order to get there:

In a nutshell, the Fed shockingly admits that their meddling via HAMP and other programs were ineffective and only juiced housing prices by about 5%. 

The Fed candidly discussed how poorly the program worked:

"A study found that in a best-case outcome, 20 to 25 percent of modifications will become permanent.[5] In 2008, one in three homeowners devoted at least a third of household income to housing; one in eight was burdened with housing costs of 50 percent or more.[6] Failed modifications suggest that, without strong income growth, the bounds of affordability can be stretched only so far.

Without intervention, modest home price declines could be allowed to resume until inventories clear. An analysis found that home prices increased by about 5 percentage points as a result of the combined efforts to arrest price deterioration.[7] Absent incentive programs and as modifications reach a saturation point, these price increases will likely be reversed in the coming years. Prices, in fact, have begun to slide again in recent weeks. In short, pulling demand forward has not produced a sustainable stabilization in home prices, which cannot escape the pressure exerted by oversupply (Chart 3)."

As a result, they are dramatically ramping down HAMP modifications:

As you can see below,  the effects of pulling forward demand using the housing tax credit were catastrophic:

The Fed is basically admitting that housing has been a complete nightmare since the tax credit has expired.  The time on the market for homes has surged, prices have continued to fall dramatically, and the number of offers and closed transactions and offers have also collapsed after pulling forward demand.

The Bottom Line

The Fed is basically admitting that the programs they designed to prop up housing was a total failure.  75-80% of the modifications have failed.   I have been screaming about this would not work for two years now.  One must wonder how many billions could have been saved by just allowing prices to revert to the mean.

As I have said before, you cannot re inflate bubbles once they burst.  Housing prices were simply mathematically unaffordable when they rose 85% from their mean.  The only answer in the first place was to just let them fall to levels where buyers could afford them.

That being said:  I give the Fed some serious kudos for coming out with this report.  It's the first logical thing I have heard from them in a few years.  I will always give the Fed credit where credit is due.  I am often very hard on them, but I will be the first to admit that I am pulling for them if they decide to do the right thing.

They have a long ways to go yet but hey:  It's a start.

This will not be good in the short term for the housing or banking industries if the Fed winds down these programs.  A 23% drop in housing prices to the reversion of the mean is a long ways down, and we all know that bubbles almost always overshoot the mean when they are in the process of bursting.

Prices are already down 33% so the total peak to trough drop in housing prices according to the Fed would be 56% when it's all said and done.  I guess this is possible but it sounds optimistic to be when you consider the fact that housing prices rose 85% in 2006 at the peak of the bubble. 

The banking stocks are all down today and I am sure this housing report isn't helping.

Wednesday, December 22, 2010

Gas Prices Soar: Thank's Ben!

Stocks were quiet once again today as the market begins to wind down for the holidays.  Stocks closed slightly higher.  Bonds were down and gold was also down slightly.

I sold some gold today.  Many of you may ask why I would turn this holding into worthless US dollars.  Don't get me wrong here: I still remain bullish on the metals longer term.  However, I haven't liked how gold has acted over the last few weeks especially relative to other commodities.  It's feeling toppy to me and I figured I can always buy it back later.

Speaking of commodities I wanted to discuss oil and gas a bit tonight.  I am sure many of you have noticed that it has gotten increasingly more expensive to fill your gas tank in recent weeks.  In fact, there has been a pretty large spike in gas prices just in the last few days:

Oil also remains stubbornly high despite weak demand:

My Take:

This is not helping things folks.  Oil is used to make pretty much everything in our economy.  Gas prices act like a tax on the consumer when it starts to rise substantially.  People begin changing their purchasing habits when it rises over $100 a barrel.  I think it's already having an effect right now as wages fall and unemployment rises.

The NIKE warning of higher input costs needs to be taken seriously by the markets. 

It's not just oil folks:  Other commodities like cotton are also rising sharply as the middle class in the emerging markets continue to rise.

Over the longer term I see no reason why this will change.  We could see a hiccup in the shorter term as a result of some severe deflationary forces as the westernized world's economies collapse but this will only be temporary.

There are two reasons why I say this:  China and India.

The one area where I remain bullish longer term is Asia and India.  When I look at China I see late 1800's America.  We were a manufacturing powerhouse back then, and our middle class flourished as we produced things like steel for the rest of the world. 

As our nation developed into the most powerful economy on earth in the 20th century we slowly morphed into a service/consumption based economy. 

As a result, we decided to ship our manufacturing jobs over to China/India.  We are now learning that this was a HUGE mistake.  This is a shame because it's too late to change things now.  These jobs are never coming back unless Americans agree to work for $300 a month.

At any rate, "it is what it is" which means China will eventually replace America as the largest economy on the planet.  There will be some growing pains along the way but I don't see how it doesn't eventually happen.

That being said, in the shorter term China is going to have some serious problems to deal with as a result of the westernized world's economic issues.  For example, the Fed is essentially destroying our currency as we continue to spend money that we don't have.

This threatens China's treasury holdings and it also creates severe inflation problems in the Far East.  China is also facing other inflationary forces from it's people that want higher wages and a better life.

China has no choice but to give in to this pressure in order to avoid social unrest.  As a result, their middle class is soaring and their demand for better food and goods is soaring right along with it.

The Bottom Line

China's growth is going to put us in a precarious position because it's going to create inflation for the necessities that we need in order to live at a time when we cannot afford it. 

The inflation/deflation debate IMO has been resolved:

We will see inflation in the things that we need for everyday life, and we will see deflation in assets like housing that are not.  This is going to be my theme for 2011. 

The Fed's trashing of the US dollar will make this problem even worse.  They are getting a free pass for now thanks to Europe's troubles but this is a temporary reprieve. 

Making matters even worse is the speculative money that continues to fly into commodities as the smart money continues to lose confidence in the equity/bond markets.

This hot money will make the commodity trade increasingly volatile as the economy continues to free fall.  I expect too see wild swings in all commodities throughout the year.

None of this will be good for the consumer of course.  I could see $3 per gallon swings in gas prices over the next 12 months as oil deals with currency,demand, and speculative forces that will become increasingly more volatile in 2011 as the world suffers through another year of global financial chaos.

Hang on tight folks.  It's going to be a bumpy ride.


The Real "Squawk on the Street"

Try a different morning routine today as you sip your coffee before you go to work.  It's amazing what you can learn when you look at our financial markets from the outside:

Tuesday, December 21, 2010

Meredith Whitney Strikes Again/Nike

Stocks rose once again today as the Santa rally rolls on.  Meredith Whitney was out with some more bear porn this afternoon on CNBC as she explained her "municipal default" thesis.

Please watch her interview below ESPECIALLY if you own a lot of munies in your portfolio.

My Take:

Meredith hits it out of the park once again.  I gotta admit I think I am in love with this woman.  She is sharp as a tack.  IMO, her greatest asset is that she has the ability to see problems before her competitors do as a result of her tireless research.

Mosty analysts feel compelled to ignore the facts and say whatever they need to say in order to get you to buy stocks.   This is why 98% of these blowhards on CNBC need to be ignored.

There are very few analysts that I pay attention to.  However, I stop and listen when someone like a Jim Rogers gets on TV because they don't have an agenda.  He already made his billions so he doesn't care what you do with your money.

I don't believe Meredith has one either because I see the research that she does.  It would probably be much more profitable for Meredith to sellout and become a bulltarded shill.  Obviously it's not in her blood to sell her soul to the devil for a few bucks. 

She bravely continues to march on and preach the truth.  All I can say is god bless her.   It hasn't been easy:  Meredith received death threats after telling the truth about Citi before it collapsed and had to be saved by the government.  I am sure she didn't make any freinds today either.

IMO, she continues to do some of the best work on Wall St and she is 100% right on the muni crisis.  I had no idea muni debt issuance doubled in the last 10 years.  This tells me minues are just another Wall St Ponzi scheme that is not sustainable.

Hearing Mrs. Whitney discuss social unrest was also an eye opener.  If she is right, you can expect to see massive union riots similar to what we have seen in Greece.  The gangsters on Wall St must have been choking on their caviar once she got done with this interview.

NIKE Earnings

OOOPS!!!......This is going to leave a mark....

From Barrons:

"Nike CEO Mark Parker sounded confident on the footwear and apparel giant’s second quarter conference call, but he warned analysts that Nike (NKE) will see margin pressure in the quarters ahead as input costs rise. Nike beat analysts’ earnings and revenue estimates for the second quarter, but the stock fell more than 5% in after-hours trading.

Parker and the other executives on the call said costs for commodities like cotton, as well as labor and transportation costs, have increased in recent months and will soon begin to hit Nike’s bottom line. Parker said margins could be squeezed through the end of the fiscal year, and CFO Donald Blair said he expected margin pressure for up to 18 months. Blair also said that a stronger dollar could weigh on future results."

Quick Take:

I hate to say it but I told you so!!!  You can thank Ben Bernanke's idiotic QE for triggering the commodity run and the Chinese inflation which is forcing wages to rise over there.  You can also thank the European debt crisis for the rising dollar in recent weeks.

The Bottom Line

Wall St can't have it both ways.  Everything is always bullish.  If our dollar falls then exports will rise.  If the dollar rises then it's a sign our economy is strong.

I say BS.  Stocks have risen 22% from the summer lows and are priced for PERFECTION.  This rise has occurred despite learning that our states are broke, 1/5 of the country is unemployed, and the PIIGS in Europe now stand on the brink of collapse.

How on earth does Wall St think this run will continue given the state of the global economy?  Are they now dealing crack down on the trading floors?

One thing has been clearly obvious for over a year now:  The stock market decoupled from the economy over a year ago as the trading robots took over Wall St.  How long this lasts is anyone's guess, but I do believe that eventually the two will get back on the same page.  When it does look out below.

I hope the Fed is watching companies like NIKE struggle as a result of their zero interest rate/QE money printing policies. 

You create bubbles throughout the financial system when you are reckless with monetary policy, and companies are going to start feeling the pain down the road as inflation takes center stage in 2011.

It's time to end all of this nonsense and start focusing on creating stability and confidence within our markets instead of running them like a casino on steroids.

Has the Consumer Really Recovered?

If you look at the most recent data from the Consumer Metrics Institute(CMI) the answer is a resounding NO.

I love the CMI because it looks at how the consumer is actually performing in the 10 key areas of consumer spending.  Here are the 10 sectors that they use to compile their consumer spending data(Technology and Travel are the two that get cutoff at the end below):


The CMI does not include the numbers like inventory builds and government spending which are what the government uses to create our quarterly GDP number number. 

As you can see below, the consumer spending trends are pretty nasty:

This chart looks at what the consumer does once GDP begins to start contracting.  The first contraction started in 2008 following the financial crisis.  The second contraction began in 2010 after GDP peaked in Q4 2009.
As you can see above, in 2009 we saw a massive rally in spending as the government threw the kitchen sink at the consumer via "cash for clunkers" and "housing tax credits" in an attempt to revive the consumer.

Back at the time I had warned that all these government stimulus programs were going to do was pull forward future demand which would be devastating down the line. 

The data is now starting to support this.  As you can see above the consumer has been in contraction for all of 2010 once GDP growth peaked in the end of 2009.  In fact, if you look at the number of days of contraction this year in 2010 versus the 2007-2009 downturn the numbers are actually worse:

Take Continued:

The CMI goes on to explain how the majority of our growth in 2010 was as a result of massive government stimulus combined with improved exports thanks to a falling currency. 

However, they believe this tailwind is about to wind down:

"► The growth in exports has primarily benefited major corporations. These same corporations have been growing margins over the past year by cutting jobs, and now appear reluctant to start major re-hiring.

► The growth in governmental spending has probably peaked, with both the future impact of Federal ARRA spending capped and with local governments being forced to deal with looming deficits.

We have said before that the real consequences of the "Great Recession" on U.S. consumers were triggered by rising energy prices, dropping home values and persistent unemployment. Until something dramatically turns around in those specific areas consumer demand for discretionary durable goods is not likely to improve."

The Bottom Line
The consumer is still on life support and the various government stimulus that turned things around are all now beginning to wind down. 

Corporations are doing well because they are slashing jobs and seeing an increase in exports.  CNBC will tell you that companies are recording record profits because the economy is receovering.  This couldn't be further from the truth.  They are hoarding profits and slashing jobs as they prepare for the worst economic crisis since The Great Depression.

As deleveraging continues the consumer is likely to disappear once again now that the government is being forced to wind down their massive stimulus as a result of rising concerns around their solvency.

The tax cuts were the last big spending bill IMO.  As the tea partiers get into office I expect the government to switch gears and start talking austerity versus bailouts.

This is going to be a very painful reality to the millions who count on government checks to finance their lifestyles that allow them to watch Dancing with the Stars on  their 70" flatscreen TV's.

The Fed's spending binge is on it's last legs and the consumer is starting to roll over and play dead.  This being said:  I wouldn't be surprised to see them spend what little they have left on Christmas which means the shopping season may not be a disaster this year.

Why would Americans do such a crazy thing when the economy teeters on collapse?  Because most Americans are too stupid to look and see what's happening all around them. 

They turn on their massive flatscreens and are told by the media talking heads that the economy is recovering, and they believe them because they are too lazy and stupid to take the time to do some research and realize they are being sold a bag of goods.

In fact, as the market rises, many of them are once again piling into stocks thinking that this is some sort of massive new bull market.

Folks, when the herd piling into stocks like this you can be sure this rally is likely on its last legs.  Wall St loves to sell to the suckers and take huge profits as Main St piles into the rally at the top.

As the economy rolls over once again as a result of the collapsing consumer, Main St will once again get left holding the bag as Wall St laughs all the way to the bank.